Aviation electronics firm Rockwell Collins (NYSE:COL) reported first quarter earnings on Thursday that handily beat analyst projections. It is currently riding the wave of strong commercial aerospace demand and should see a coming wave of business demand in the next couple of years, though most of this is already priced into the stock. The government segment will likely suffer due to defense spending cutbacks, which overall means that a few key rivals look more appealing as investments. (For more, see 2010 Wrap-Up: Defense And Aerospace.)
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First Quarter Review
Sales improved 8% to $1.1 billion. Government sales accounted for 58.6% of the top line and grew 5.6%. Broken down further, airborne solutions experienced 6.8% sales growth while surface solutions saw sales rise a modest 2.9%. Most of these sales are to the U.S. Department of Defense. The other segment consists of commercial systems sales and grew 11.9% to account for the remainder of total sales. The commercial unit sells aviation electronics to air transport as well as businesses and regional aviation clients and reported growth in every category except for in-flight entertainment products. Major customers in this space include Boeing (NYSE:BA) and Bombardier.
The government segment reported a slight 2.2% decline in operating income to $131 million. Commercial systems reported robust 23.5% growth to $84 million. Total operating income improved 6.4% to $215 million, or a healthy 19.4% of sales. Lower income taxes sent net income up by 24.8% to $151 million, or 96 cents per diluted share. Operating cash flow fell 32.1% to $57 million.
For the full year, Rockwell Collins expects total sales between $4.8 billion and $5 billion and earnings in a range of $3.85 and $4.05 per share. If the company it hits the high end of its sales guidance, total growth will exceed 7%. On the profit front, the guidance was increased and would represent year-over-year growth of more than 13%, if again the high end of the range is met.
Rockwell Collins should end the year with sales that exceed 2008 levels. Profits will still fall short of the levels a couple of years ago but the commercial aerospace market is on solid footing and the business market is in a continued recovery mode. At a forward P/E of nearly 16 and trailing free cash flow multiple close to 17, much of the business recovery is already priced into the stock.
Additionally, larger competitors including Raytheon (NYSE:RTN), Northrop Grumman (NYSE:NOC) and L3 Communications (NYSE:LLL) trade at much lower valuations. Raytheon and Northrop trade at 11.4 and 10.7 times earnings expectations for the full year while L3 is in the single digits at 9.5. These firms are more susceptible to defense spending cutbacks, but so is Rockwell Collins - and it also operates in cyclical markets of commercial and business aerospace.
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